Australia cuts its interest rate to record low 2.75%

DIFFICULT TRANSITION:Investment in mining will likely peak this year, and under pressure from a persistently high dollar, unemployment has hit a three-year high

AFP, SYDNEY

A man crosses a road with office supplies on a trolley walk in the central business district in Sydney, Australia, yesterday.

Photo: AFP

Australia’s central bank cut interest rates to a record low 2.75 percent yesterday as investment in the Asia-driven mining sector hits its peak and the persistently high dollar squeezes local industry.

The Reserve Bank of Australia’s (RBA) shock decision to slash 25 basis points takes the official cash rate to never-before-seen lows, and is aimed at priming those areas struggling as the economy transitions away from mining.

“With the peak in the level of resources sector investment likely to occur this year, there is scope for other areas of demand to grow more strongly over the next couple of years,” RBA Governor Glenn Stevens said. “[The bank] judged that a further decline in the cash rate was appropriate to encourage sustainable growth in the economy, consistent with achieving the inflation target.”

The Australian dollar slumped to US$1.0184 from US$1.0238 immediately prior to the bank’s meeting, where it had been widely expected to leave rates on hold at 3 percent, reached in December last year.

Rates have not been this low since the establishment of the reserve bank in 1959.

Analysts said the Australian economy needed stimulus as mining exports to Asia, which helped it dodge recession during the global downturn, recede.

“Mining investment has been the main driver of growth in recent years, but it is set to start declining within the next couple of quarters,” Capital Economics analyst Daniel Martin said, adding that he expected a further cut before the end of the year.

“Other sources of growth will be needed to avoid a significant overall slowdown,” he said.

Treasurer of Australia Wayne Swan welcomed the cut, saying monetary policy would play an important part in “the transition from resource sector growth through to non-mining sector growth.”

He rejected comparisons with the financial crisis as “irresponsible,” saying that at that time, the Australian dollar was worth US$0.60, “global growth demand had tanked and global demand had fallen off a cliff.”

The Australian government downgraded its annual revenue forecasts yesterday, warning income had plunged A$17 billion due to a China-driven commodity slowdown and pressures from the dollar, paving the way for spending cuts.

Stevens said domestic growth slowed in the second half of last year and was running below long-term averages, with unemployment rising to 5.6 percent in March, its highest level in more than three years.

The economy expanded 0.6 percent in the three months to December last year and 3.1 percent through last year, with analysts warning that the key mining sector was covering up broader weakness as the resources boom nears its peak.

Stevens said there were “prospects for some increase in business investment outside the resources sector over the next year,” with productivity improving and labor costs down.

Globally, he said that growth was expected to come in a little below trend, with the US on a “moderate” trajectory and China at a “more sustainable, but still robust pace,” but Europe weighing on the outlook.

Stevens said inflation was currently running “lower than expected,” with the exchange rate, on the other hand, “little changed at a historically high level over the past 18 months.”

“[That] is unusual, given the decline in export prices and interest rates during that time,” he said. “Moreover, the demand for credit remains, at this point, relatively subdued.”